Spain's consumer prices rose 6.1% year-on-year in February, a faster pace than the 5.9% rate in January and above the 5.7% expected by analysts polled by Reuters. Germany's 10-year government bond yield , the bloc's benchmark, was last up 9 basis points (bps) to 2.676%, after hitting its highest since July 2011 at 2.71% earlier in the session. Yields move inversely to prices. Traders' expectations for the peak in interest rates hit new highs after the inflation data was released, according to derivatives prices. "Inflation data are still leading markets," said Massimiliano Maxia, a senior fixed-income specialist at Allianz Global Investors. "We were already forecasting a 50 bps rate hike in March that would drive the depo rate to 3%, then further 50 bps or more likely 75 bps are seen by year-end, of course depending on the economic data," he said.
"It makes sense to expect a depo rate peaking at 3.75-4%." The December 2023 ECB euro short-term rate (ESTR) forward was at 3.832% after rising to 3.875%, a level which implies an ECB interest rate of around 3.975% by year-end. The ESTR published by the ECB reflects banks' wholesale euro unsecured overnight borrowing costs. It is usually around 10 bps below the deposit rate. Germany's 2-year yield , most sensitive to changes in policy rate expectations, hit its highest since October 2008 at 3.191%, and was last up 9 bps at 3.153%. Expectations for higher interest rates tend to cause bond yields to rise, as investors demand a higher return on investments. A key market gauge of long-term euro zone inflation expectations hit a fresh 9-month high at 2.4825%. ECB policymakers have been fighting against expectations for a shorter rate hiking path since the beginning of February. Chief Economist Philip Lane told Reuters in an interview the central bank will not lower rates "until we have very strong evidence – not just in the forecast, but also in our ongoing assessment of underlying inflation – that we are returning inflation to target".
Italy's 10-year bond yield hit its highest level since Jan. 3 at 4.575%, and was last up 11 bps at 4.537%. The spread between Italian and German 10-year yields widened slightly to 185 bps. "BTP spreads have shown an impressive resilience to the latest leg of core rates sell-off and high bond issuance," Erjon Satko, rates strategist at BofA, said. "The bulk of the support likely comes from short positioning squeeze, and high/consistent buying flows from domestics, especially households," he added. The German yield curve deepened its inversion, showing markets expect rates to fall in the longer term after the ECB manages to tame inflation. The gap between German 2-year and 10-year yields dropped as low as -52.5 bps, its lowest level since October 1992. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ ESTRfwd ITDEyspread ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Reporting by Stefano Rebaudo, editing by Emelia Sithole-Matarise and Christina Fincher)
